 the transaction was not chargeable to tax India since it involves transfer of shares of a non-resident company by one non-resident to another & is not a transfer of capital asset in India.

Bombay High Court Decision

High Court Dismissed the petition of Vodafone BV & accepted that the transaction had a significant nexus with India and proceedings initiated by it cannot be held to lack Jurisdiction

Key Observations :

Tax planning is legitimate so long as the assesses does not resort to a colorable device or a sham transaction with a view to evade taxes;

A controlling interest which a shareholder acquires is an incident of the holding of shares and has no separate or identifiable existence distinct from the shareholding

Conclusions :

The essence of the transaction was a change in the controlling interest in HEL which constituted a source of income in India.

Accordingly, Indian Tax Authorities have acted within their jurisdiction in initiating the proceedings against the Petitioner for not deducting tax at source. The provisions of S. 195 would operate

Supreme Court’s Decision

Supreme Court held that situs of shares situates at the place where the company is incorporated and / or the place where the shares can be dealt with by way of transfers. Thus the situs of shares of CGP is not in India.

Section 9 covers only income arising from a transfer of a capital asset situated in India; it does not purport to cover income arising from the indirect transfer of capital asset in India

Section 195 would apply only for payments made from a resident to a non-resident, and not between two non-residents situated outside India.

In the instant case, the Hon’ble Court observed that the transaction was between two non-resident entities through a contract executed outside India. Consideration also passed outside India. The transaction has no nexus with the underlying assets in India

It involves transaction between two non-residents in respect of shares of a company incorporated outside India. Therefore, the Indian Tax Authorities have no territorial tax jurisdiction over the said transaction

Supreme Court held that since the capital gains was not taxable in India, Vodafone was not required to deduct TDS on the said capital gains.

Impact

As a result Vodafone was having a obligation to Pay Rs. 20000 Crores.

These amendments will take effect retrospectively from 1st April , 1962 and will accordingly apply in relation to the assessment year 1962-63 and subsequent assessment years